The only solution to the current economic mess that we find ourselves in is in fact time. It is going to take time for home prices to fall to an affordable level and the economy will not begin to recover until they do...

Things are not going to get better until home prices reach a bottom. The values of the toxic assets on banks balance sheets are not going to stop falling and in turn the financial system will not stabilize until they do.

The government can do whatever it wants, including using the hard-earned tax dollars of current and future generations to prevent the foreclosures of homes that should have never been purchased by less responsible individuals who didn't understand what they were getting themselves into or just got greedy and bought more house than they could reasonably afford, but home prices are going to continue to fall regardless. Uncle Sam is just delaying the inevitable.

The fantastic charts that I attached above support this theory. Here's what Abelson said about them:

...will reducing the number of foreclosures, desirable as that may be, halt the erosion in prices. While fewer foreclosures are likely to slow the rate of decline, they won't reverse the downtrend or determine "where homes prices end up."

and

House prices, in our bloodshot view, have another 20% or so to fall before hitting bottom and, at the earliest, we're talking sometime next year. And, possibly more important, a meaningful brightening of the current, profoundly bleak jobs picture, isn't in the cards for certainly as long, if not longer.

I strongly believe that the U.S. GDP will continue to fall and unemployment continue to rise until home prices drop another 10% to 20% and hit bottom some time in 2010. Unemployment in America will likely top out at somewhere around 10%...using the understated official metric.

For me, ratios like

- Real Estate Value & Mortgage Debt as a Percentage of GDP

- Existing Home Prices vs. Median Income

- Ratio of Home Prices to Rents

wll be the most important indicators of how far we are from reaching a bottom in this economic crisis. The sooner we get to an affordable level in home prices, the sooner the economy can begin to recover. By slowing the rate of foreclosures, the government may prevent some of the overshooting that home prices might do to the down side if they fall too rapidly, but make no mistake about it the government cannot stop prices from reaching their natural bottom. The question is whether slowing down the inevitable is with the price of bailing out undeserving parties, undermining legal contracts, and amassing a tremendous that this and future generations will have to pay.

The challenge right now is that GDP, median income, and rents are all falling. So, even if home prices fall by 20%, the ratios might not be back to historic norms. I think history shows us that 2010 is the optimistic scenario... I suspect you would agree with that.

The question is whether slowing down the inevitable is with the price of bailing out undeserving parties, undermining legal contracts, and amassing a tremendous that this and future generations will have to pay.

There is a huge pile of bad debt, and the sooner that a value is assigned to that debt, the better off we'll be. Part of that is having home prices hit bottom. Part of it is having as many of the garbage-grade loans rewritten so the markets can move forward with confidence that the loan might actually be repaid.

I stood aside during the housing bubble, and I was living in San Francisco at the time where the bubble was huge. It wasn't easy, and my wife and I had to endure quite a bit of ridicule for being renters. So, I feel a lot of the bitterness about the housing bubble. It was a pile of crap.

Yet, it happened and now it has collapsed. Better to collect as much of that bad debt as we can. So, I actually think the homeowner bailout is about as good as the government can do. I agree that it won't stop the slide in home prices. Hopefully it will stabilize some neighborhoods so they don't turn into havens for meth labs and crack dens.

What it does allow is for people who want to stay in their house to refinance at lower rates. For people with ARMs, because they are now under-water, they cannot refinance and will default. Who wins if they default? The home goes into foreclosure, it gets abandoned, it likely gets vandalized, and it sells at auction for 30% of what the owner paid (OK, so the buyer of distressed property wins, but everyone else loses). Bear in mind, we've already decided to socialize the losses from defaults by bailing out the banks.

So, wherever possible, lets let the current occupants (I hate to call someone an "owner" when they don't even have 10% equity in a place) refinance and pay the full value of the loan at a lower interest rate and collect $0.80 on the dollar where we can.

After all, if you don't foregive principle, how much moral hazard does this create? The people who bought at the peak are still underwater, and they are still saddled with debt for the next 30 years. Plus, by staying in their home, they are doing the most responsible thing they can (after having done something stupid in buying too much house or taking a stupid loan to begin with).

In any case, like I said, it's debt collection time. Better to get $0.80 on a dollar than $0.50 on the dollar or worse--which is what seems to be happening with all the foreclosures.

(My thinking on this has actually progressed to the point where I'm ready to accept reducing principle, because it's better to get $450,000 from the current occupant than $300,000 in a foreclosure auction.)